Market report: Gloomy brokers add to the pub chains’ misery

Friday 29 August - 4pm update

The lack of spare cash in drinkers' pockets appears to be having a detrimental effect on the UK's big pub chains, judging by the collapse in their share prices this year.

Today, two more City hotshots have added to the hangovers being suffered by investors and publicans the length and breadth of the country by downgrading their ratings in the face of falling beer sales and squeezed profits.

Icelandic broker Landsbanki has cut Enterprise Inns, down 12p at 302¾p, making it the biggest blue-chip faller, and Mitchells & Butlers, 7¾p firmer at 287½p, from hold to reduce, while rival Credit Suisse has started coverage of Enterprise and Punch Taverns, down 1¾p at 282½p, with an underperform rating.

Credit Suisse also has a neutral rating for Mitchells & Butlers, while Landsbanki has moved regional brewers and pub chain operators Greene King, 2p dearer at 530½p, and Marston's, 3¾p cheaper at 195¾p, from hold to reduce.

Enterprise trades just pennies above record lows and has slumped from a peak of 649p since the start of the year. But the pub chains generally have been in decline since before the start of the smoking ban in July last year. Moves by several of them to convert their portfolio of pubs into real estate investment trusts were thwarted by the credit crunch and, in the meantime, the supermarkets have stepped up the pressure by offering cheap booze to consumers at prices the pubs could never hope to compete with.

More and more cash-strapped drinkers are buying their booze from the local supermarket and staying at home, rather than pay at least £3 a pint for their beer. Landsbanki believes that the household spending outlook in 2009 was not gloomy enough and we should not expect an early return to growth in the pubs sector. Credit is also concerned that profitability will continue to come under pressure during the next year due to a consumer slowdown and inflationary pressures.

Shares failed to live up to best expectations following a strong performance yesterday on Wall Street. The rise in the FTSE 100 index was restricted to 31.1 at 5632.7 in thin trading as shares on Wall Street ran into profit-taking this afternoon, leaving the Dow down 74.66 at 11,640.52. New York will be closed on Monday for Labor Day celebrations.

Banks enjoyed another good showing as the bears continued to be squeezed. Royal Bank of Scotland rose 7p to 237p, while HBOS put on 11p at 316½p in the face of some grim numbers from rival Bradford & Bingley. Barclays added 5p at 354½p.

Speculative buying continued to be directed at J Sainsbury with the price adding 5¾p to 349¾p.

Yesterday, the shares were being chased higher on talk of a renewed bid of 500p a share from its 29% shareholder Qatar Investment Authority. But traders pointed to the low volumes and suggested the short-sellers were being squeezed as they tried to square up their positions, thereby driving the price higher.

Car dealer Pendragon staged a small rally in the wake of yesterday's gloomy profit numbers, adding 0.39p to 9.64p. But Citigroup has halved its price target for the Stratstone and Evans Halshaw car dealer from 20p to 10p. The group has warned that profits for the full year will fall short of last year's £46.5 million with sales on the slide.

Some housebuilders came under further selling pressure with Bovis Homes losing 3p at 437p, Bellway 21p at 619p and Berkeley Group 24½p at 856½p. UBS has raised its target for Bovis from 382p to 440p but is sticking with its neutral rating.